Is the Gini Index of Inequality Overly Sensitive to Changes in the Middle of the Income Distribution?

19 Pages Posted: 13 Dec 2016 Last revised: 21 Jan 2017

See all articles by Joseph L. Gastwirth

Joseph L. Gastwirth

George Washington University - Columbian College of Arts and Sciences

Date Written: December 12, 2016

Abstract

The Gini index is the most commonly used measure of income inequality. Like any single summary measure of a set of data it cannot capture all aspects that are of interest to researchers. One of its widely reported flaws is that it is supposed to be overly sensitive to changes in the middle of the distribution. This claim is examined by studying the effect of small transfers between households or an additional increment in income going to one member of the population on the value of the index. It turns out that the difference in the rank order of donor and recipient is usually the most important factor determining the change in the Gini index due to the transfer, which implies that transfers from an upper income household to a low income household receive more weight that transfers involving the middle. Transfers between two middle income households do affect a higher fraction of the population than other transfers but those transfers do not receive an excessive weight relative to other transfers because the difference in the ranks of donor and recipient is smaller than the corresponding difference in other transfers. Thus, transfers between two households in the middle of the distribution do not receive more weight than a transfer of the same amount from an upper income household to one in the lower part of the distribution. Similarly, the effect on the Gini index when a household in either tail of the distribution receives an additional increment is larger than when a middle income household receives it. Contrary to much of the literature, these results indicate that the Gini index is not overly sensitive to changes in the middle of the distribution. Indeed, it is more sensitive to changes in the lower and upper parts of the distribution than those in the middle.

Keywords: Gini Index, Income Distribution, Sensitivity

JEL Classification: D31, C18

Suggested Citation

Gastwirth, Joseph L., Is the Gini Index of Inequality Overly Sensitive to Changes in the Middle of the Income Distribution? (December 12, 2016). Available at SSRN: https://ssrn.com/abstract=2884308 or http://dx.doi.org/10.2139/ssrn.2884308

Joseph L. Gastwirth (Contact Author)

George Washington University - Columbian College of Arts and Sciences ( email )

Washington, DC 20052
United States
202-994-6458 (Phone)
202-994-6917 (Fax)

HOME PAGE: http://www.gwu.edu/~stat/gastwirth.html

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